Adjusting to reality
Social and political challenges in the wider Levant and North Africa are in stark contrast with the economic boom much of the GCC is enjoying. The GCC economies are benefiting from years of robust hydrocarbon dynamics, although they also face longer-term challenges.
Saudi Arabia is pouring resources into its longer-term development objectives, supporting healthy economic growth. Yet this brings inflation and concerns about productivity. Dubai‟s economy, which not long ago faced severe challenges, is performing extremely well against a backdrop of strong investment in the region, benefiting from its role as a trade and services hub. Jordan is now fast-tracking badly needed energy reforms to slow the drain on government finances. Egypt‟s political transition is ongoing, and funding from the GCC is supporting the Egyptian pound (EGP) and the balance of payments. Reforms, however, have been delayed and look unlikely as long as social pressures and political uncertainty remain high.
We see three core themes for the region:
1. The need for subsidy reforms to reduce the load on government finances. While these measures may bring near-term pain, they are essential to reduce heavy subsidy burdens in the region.
2. Employment challenges are widespread, even in wealthy economies like Saudi Arabia. Creating sustainable employment opportunities is a priority.
3. The region needs to develop strong and robust legal systems, which are key to sustaining cross-border investment flows that are necessary to support economic growth and create employment.
Eoin Treacy's view The Middle Eastern region has been among global laggards during the post credit crisis boom that has overtaken the majority of global stock markets. Political upheaval, violence and inflation have increased uncertainty. Changes in the administration of countries such as Libya have also resulted in oil production cuts However countries that have avoided the ravages of war, have been able to increase production and the economic outlook is turning more positive. The elevation of Qatar and the UAE from frontier to emerging market status by MSCI in June appears to have been a catalyst for improved investor sentiment. (Also see Comment of the Day on from June 5th).
Saudi Arabia has held a progression of higher reaction lows since late last year and most recently found support in the region of the 200-day MA from September. While some additional consolidation looks likely, a sustained move below the trend mean, currently near 7500, would be required to question medium-term recovery potential.
Qatar found support in the region of the 200-day MA and the upper side of the underlying two-year range from September. Kuwait appears to be forming a first step above its medium-term base. Dubai moved to a new recovery high prior to the Haj holiday and while somewhat overbought in the short term, a break in the progression of higher reaction lows would be required to question recovery potential.
Among Middle Eastern funds, the London listed Qatar Investment Trust continues to build support above $1 following its breakout earlier this year. The US listed T.Rowe Price Africa and Middle East Fund has held a progression of higher reaction lows for more than a year and continues to extend its uptrend. The US listed Market Vectors Gulf States ETF has been forming a first step above its four-year base since June and is now testing the upper boundary.
While seldom grouped in the same category, Israel has benefitted from the cooling of international tension surrounding Syria and the Tel Aviv 100 continues to extend a breakout from its more than yearlong range.